Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Wednesday, February 12, 2014

Column in local paper

One of the nice features of my neighborhood in the West Village is a local paper that comes out every month, called Westview, which covers local issues, such as the loss of St. Vincent's Hospital (leaving much of lower Manhattan without a nearby hospital or emergency room), along with cultural news and the like from our area.

I write occasional short pieces for Westview, which also was nice enough, a few years ago, to run a feature relating to my novel, Getting It.

I encourage those who are interested to click on the link and also to look at other features in Westview. However, here are some highlights from my piece (which overall is only about 500 words):

In the recent mayoral campaign, then-candidate Bill de Blasio’s signature proposal was to address New York’s “tale of two cities” – the extremely rich versus everyone else – by increasing the City’s income tax rate for people with incomes over $500,000, from 3.9 to 4.4%. ... [D]oes the tax policy literature (in which I write professionally) support viewing the proposed tax increase as a good idea? I believe that it does ...

The literature on state and local taxes strongly suggests that, as a general rule, it’s wise to leave progressive taxes to the national level, rather than imposing them sub-nationally (such as in a given city or state). The reason is potential exit from the taxing jurisdiction by high-earners. For example, if one town raised taxes on high-earners while all of its identical neighbors did not, it’s a fair bet that many of the intended targets of the tax would simply leave. Exiting the entire country, if federal income taxes go up for the wealthy, is a lot costlier for taxpayers to execute, and thus is not as much of a problem (Facebook’s Eduardo Saverin notwithstanding).

However, New York is not just one in a sea of identical towns. It has genuine market power these days, as a global destination city like London and very few others.... Clearly, high-earners are willing – at least, up to a point – to pay a premium to live here.

Thus, even if you don’t share Mayor de Blasio’s (and many voters’) discomfort with rising high-end inequality, it would be foolish for New York City not to take advantage of its privileged, albeit not quite impregnable, position. So long as we can secure significantly more tax revenues, with only relatively modest behavioral responses (such as exit by high-earners), it would be like leaving money on the table for the City not to try to extract a bit more.

Obviously, this argument – like that for increasing the minimum wage – can only be pushed so far. Overdo it, and you shoot yourself in the foot. The more the tax on high-earners goes up, the more tax base is likely to be lost per dollar of revenue raised. At some point, one would even run into the Laffer Curve, where raising the tax rate actually loses revenue. In my view, however, we are still well short of that point.

Suppose the de Blasio plan is enacted, and it proves a success. How much will it do to address our “tale of two cities?” ... [T]he answer is: Not all that much. New York City is a cork bobbing on the waves of the global economy. Overall global trends pertaining to high-end inequality will accentuate – or else not – depending on factors that the City cannot control or even much influence. Yet so long as those trends do continue, and so long as we continue to be a favored global destination city – an asset that we must assiduously preserve – taking modest advantage is not wild-eyed radicalism, but simply sober common sense.

UPDATE: A comment that I received offline from a correspondent has persuaded me that I should not be so certain of the accuracy of my assumption in the above piece that NYC is below the peak of the Laffer Curve for the super-rich. For example, if the City raises their income tax rates, they don't have to sell their pied a terres but can be more careful to beat the NYC residency rule. Meanwhile, if they are in town less for this reason, it's conceivable that NYC-area consumption will fall, leading to adverse multiplier effects on NYC even if not national tax revenue. I would certainly welcome any studies or good empirical assessments of this issue that anyone may have available.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.